Panama Investor Blog

Nikki Beach to double room capacity

I am surprised to see the Nikki beach announcing a doubling in the size of the hotel project from 156 to 300 units in the economic climate. The developers and promoters are certainly optimistic about the future of tourism in Panama. I wish the the best of good fortune!

Excerpts from LA Presna:

“We did redesign some of the architecture and engineering, because when the project was launched in November 2008, when the hotel went from 156 rooms to 300 rooms. That redesign took over six months,” said Maruquel Gálvez, of RG Inmobiliaria, developer and owner of Nikki Beach Playa Blanca, Casa Grande Bambito and Playa Blanca Hotel. Gálvez explained that many of the modifications were made to accommodate a casino within the complex.

“Now we have a tower structure that’s more robust, lower and wider,” he added. “And despite changes in the original schedule, the date of opening of the hotel holds for 2012 and we’re already in the pre-sales stages.”

The architectural and engineering firms TSYA and BMA are collaborating on the project, while Destiny Real Estate is responsible for its sales and marketing.

Trump Ocean Club Financial Update

One of our regular commentator's (Viewpoint) posted the following as a comment to another post this week, but I felt it should be read by anyone interested in Panama Real estate. Most agree that the fate of the Trump Ocean Club will play a significant roll in what happens in the Panama real estate market. I have also posted a PDF of the presentation and discussion of the project produced by Newland.

Download Newland's Quarterly Conference Call _May 2009

From Viewpoint

TOCLUB released their financial and sales results through the period ending April 30, 2009 today and conducted a conference call to discuss those results that was accessible to fixed income analysts. Sales have been slowing and they are now projecting a slower pace of sales than prior periods because of the global economic conditions and their lack of the type of inventory that has been the most popular to date.

They have sold (as of April 30, 2009) 840 units out of the total of 1,054 projected unit sellout representing 79.7% of the units and 71.3% of the projected sellout revenues totaling $543.4 million. Sales through April 30, 2009 total $387.2 million with remaining unsold inventory of $156.2 million of which $31.2 million is commercial, $108.8 is residential condo, $13.7 is Hotel Condo and the remainder is $2.5 million private beach club memberships.

Out of a starting inventory's of; 635 residential units they have they have 165 unsold residential units; 369 Hotel Condos they have only 21 unsold Hotel Condos; 50 commercial units they have 28 unsold commercial units.

It appears that the Casino property might not be included in the commercial unit count nor in the projected sales that were presented. There have only been seven defaults that resulted in terminations of the contracts. Seven out of 840 contracts to date is not bad.

Restricted Cash on hand as of March 31, 2009 (to fund remaining construction work) was $132,732,288. Work haas progressed to Piso 26 at the current rate of one floor per week. They expect progress to increase to 1 1/2 floors per week (6 per month) after the building reaches the 35 floor to the 66 floor.

65% of the remaining contract payments due May 5, 2009 were received on time and the remaining 35% of purchasers requested 30 day extensions. After an account is 60 days delinquent (two 30 day extensions) the contract is terminated and the unit is returned to inventory to be resold.

There are a few other things I could add to that post regarding the debt reserve account currently having over 7 million of the required 10.450 million interest payment due next interest payment due November 15, 2009. 

I now more fully understand why they offered the 20% discount to "selected" purchasers to raise cash.  This action was only targeted to a small group of purchasers to raise enough money to fund the remaining funds necessary to fund the special bond reserve account through completion of the project. In the face of slowing sales the only source of funds to keep the reserve account in compliance with the requirements of the bond covenants is collection of these receivables or advances (loans) from the promoter who is on the hook to fund any increased costs of the project.  They (the promoter) can make this discount (20%) revenue neutral only but buying their debt outside the structure of the project and not within the structure.  They are only raising enough money to supplement the cash flow from the slower pace of sales which is used to fund overhead and the payments to the cash reserve account.

Tell me one other real estate promoter that makes complete financial disclosure where all funds are held by a third party ???? The numbers are there for the world to see and ask a question you get a straight answer.  Listen to the playback of the conference call from yesterday.  They fielded plenty of tough questions with full and complete disclosure.

This is the way projects are built in Colombia with a third party (fiduciary) holding all the funds releasing only the funds to pay construction.  This is by far the cleanest project in Panama City.  These guys are professional and know what they are doing.  Would I buy a condo for $5,000 mt2 HELL NO but I would buy their bonds all day long and sleep at night.

Trump Ocean Club resists crisis

I stumbled on an article in LA Prensa today which sheds more light on the status of the Trump Ocean Club. If the link is broken you can read the Spanish translation at the end of my commentary.

As this is the most important condominium project underway in the city, what befalls Trump will surely befall all. The developer assures us that the project has no problems other than the challenge of building such a high tech structure where it has not been done before, but is on track for completion in August of 2010. Sales are 80% and the money for construction is in line with expectations for the status of the project.

Excerpts: Despite the winds of caution to developers suggested Panamanians on the 'project for foreigners', the promoters of the Trump Ocean Club, one of the most famous, say that while there has been an easing in the pace of sales, this has not been "so pronounced".

Even with sales, these projects should be careful, as Moses Cohen, chairman of the Banking Association of Panama, because today there is no guarantee that a person who paid 20% of a house in Panama, to pay the remaining 80%. Trump Ocean Club still claims not to have suffered neglect contracts.

But, there lays the one big fly in the ointment. Trump will not know about the validity of the contracts until it is time to collect the balance. The buyers hope for an economic recovery and have two years to wait it out, and they will wait until the last minute, hoping for delays in construction.

Two years ago 20% down on a Trump project at 50% of what you would pay in Las Vegas or Hawaii seemed like a no brain-er. The project was fully funded with Bear Stearn's bonds and it looked to be a sure fire winner. Panama was booming with an explosion of high rise towers that were selling for $1200-$1500 a meter. With the announcement of the Trump Ocean Club the prices of every new project went up literally overnight by at least $1000 a meter. After all, if Trump sells for between $3500-$5000 a meter and your within eye shot, you must be worth at least 50% of that? Within a week you could not buy a condo for under $2500 a meter which of course added fuel to the frenzy as those who were in earlier could claim on paper that they had made 100% or more profit on their down payment when they sell before completion.

But this is 2009 and we are heading into the great unknown of a recession/depression unlike anyone has ever seen before. Money has dried up overnight and the banks that are willing to loan have cut back to no more than $1200 a square meter for the top of the line property. You have to be significantly vested in order to get financing these days and being a foreigner with little or no assets in Panama will require a significant down payment.  So in a year or two when the project is completed and the balance of 80% is due on the TOC, will the buyers be able to close? How many will walk away?

I believe within a year Panama will be a great buying opportunity as the apartments that were underway are completed and the high number of units on the market force the sellers to reduce prices back to where they were before the TOC announcement. How will TOC fair in all of this is really unknown, but we all hope they are successful in the end.

Trump news this week

On Monday I received The Latin Business Chronicles story about the Trump Ocean Club in Panama with a picture of the beautiful Ivanka Trump gracing the page. Under the Headline Ivanka Trump-Panama Hottest Market it reads, Ivanka Trump sees Panama’s real estate market as the hottest worldwide, with demand outstripping supply on the Trump tower there.“I have projects all over the world [and] have a unique sense of the global real estate climate and submarkets,” she tells Latin Business Chronicle. “With great conviction, [I can say that] is one of the strongest, if not the strongest, real estate market. Our biggest problem is not having enough inventory. We only have a small percent of the building left.”

She goes on to say; So what does Ivanka Trump see as the reasons for

Panama

’s success? “It’s got a great government that really supports developers,” she says. “I’m impressed with their forward thinking in bringing in new potential residents. I’m in

New York

and see as “escape to

Panama

”. I never saw that five years ago.”

Of course Panama has a lot of things going for it that are sited by Ms. Trump throughout this "interview", but the rhetoric shows she knows the country on a very superficial basis and she has the same style for hype as her father.

Contrast this story with one that appeared yesterday in the AP news with the headline : Trump Venture folds, leaving buyers strapped

Excerpts:Stephen and Linda Drake cast aside concerns about owning property in Mexico because they believed in Donald Trump.

The Southern California couple paid $250,000 down payment on a 19th-floor oceanfront condo in Trump Ocean Resort Baja in 2006 before the first construction crew arrived.

But admiration for the celebrity developer and star of "The Apprentice" has now turned into anger and disbelief as Trump's luxury hotel-condo plan collapsed, leaving little more than a hole in the ground and investors out of their deposits, which totaled $32.2 million.

Obviously these are two very different projects with completely different financial structures, but the name Trump is attached to both and most certainly brings an air of distrust in the hollow words of the Trumps. They have obviously made some grave mistakes in the branding of the Trump name and now much of their hopes and futures lay in the Trump Ocean club, which fortunately was able to get bonds sold just before Bear Stearn's went out of business. I sincerely wish the best for the Trump Ocean Club and I hope they are truly "sold out" and the buyers are able to make their final payments when the building is complete. But I think Trump name may never recover from the many deals made during the boom times that are now going bust.

Are foreign developers treated equally in Panama?

The ministry of environment is again under fire for alleged damage to the mangroves during the construction of a golf course at the new Santa Maria residential project between the airport and Costa Del Este. What I find surprising about this is, who would trust an approval by the ministry after the Red Frog debacle? After all, Red Frog too had the ministry approval for their project, but were shut down by  a ruling of the Supreme court after millions were invested by the developer and home buyers.

But this time it will end differently. I doubt seriously if this project will be delayed because the investors/promoters behind it are some of the most powerful men in the country and they are Panamanian. That means they know the "right people" and will be able to work their way around the problem.

So, are foreign developers at a disadvantage? Absolutely! I have experienced this first hand and hear about the tales of woe from foreign developers trying to invest here regularly. It is not that the local developers hinder foreign developers, but their local knowledge and contacts help them avoid the legal problems that plague the foreigner who wrongly believes he will be treated equally under the law. I bring this up  in the hope that Panamanians will begin to realize that treating investors differently under the law will cost them dearly in the end. Foreign investors don't invest where the playing field is not equal for all players. Panama developers will do well as long as foreign investors are doing well too. In the end, without foreign investment, Panama will go back to what it was doing before the development boom, which was not selling real estate.

Excerpts from La Prensa;

The (environmental) groups say that the ministry violated its own directive when it approved the zoning for the proposed Santa Maria Golf & Country Club. The project calls for the removal of 18.5 hectares of mangroves to make way for the golf course.

In 1980, the ministry identified the area as an “ecological reserve.” Twenty years later, an executive decree stipulated that the mangroves in Juan Díaz “should be preserved.”

The ministry apparently had a change of heart in January 2007, when it zoned the area to allow the construction of residences, the golf course and commercial buildings.

The project’s environmental impact assessment (EIA) was approved by ANAM in February 2008.

Trouble for Trump Ocean Club

As the article points out, the project will get built and those at the most risk are the bond holders. But that having been said, it is obvious that pricing pressure are mounting especially with the problems in the overall condo market in the city. As prices go down there will be a lot of incentive for early buyers to walk away from paying the balance in two years, unless of course you believe that everything will be back to normal by then. Not long ago the name Trump meant a pretty sure thing but how things have changed. This is a very telling tale of woe for Panama.

CHICAGO, Dec 17, 2008 (BUSINESS WIRE) -- Fitch Ratings has downgraded the rating on Newland International Properties, Corp.'s $220 million senior secured notes to 'B+' from 'BB'. The action is a result of the significant deterioration in global real estate markets and an increase in liquidity risks associated with the timely payment of principal and interest on the notes. Newland International Properties, Corp. (Newland) is developing the Trump Ocean Club International Hotel & Tower, a multi-use tower located on the Punta Pacifica Peninsula in Panama City, Panama.

In conjunction with the repricing seen generally in all asset classes, real estate prices have fallen considerably in most global markets. Although to date, Trump Ocean Club (TOC) pricing has remained stable and some sales have continued, price declines within the Panama City submarket or at the project could lead to higher than expected default rates for existing buyers. Units are purchased at TOC utilizing a 30% down-payment scheme with the remaining 70% of the purchase-price due upon the delivery of the unit. To the extent units were purchased as investment properties or as second homes, the incentive to pay the outstanding balance of a purchase agreement could decline if global real estate values continue to be pressured. Noteworthy in this scenario, purchasers would forfeit all down payments to Newland. Price volatility could also curtail expectations of future sales.

The constraints in capital markets are expected to increase the difficulty of securing financing for real estate assets. Generally, real estate demand is affected by a lack of access to mortgage financing for prospective buyers. This risk is exacerbated by the target market of the project, which focuses on foreign buyers that do not intend to make the TOC their primary residence.

Given the downward trend in the real estate industry, a slowdown in sales at the TOC is not unexpected. Between August 2008 and October 2008 TOC experienced a significant decrease in project absorption rates. This sales pace has affected the cash position of Newland and heightened liquidity risks associated with timely payment on the notes. Liquidity on the notes is dependent on collections from future sales and on down-payment collections from previous sales to meet ongoing debt-service requirements.

Although the long-term solvency of the project appears strong (as evidenced by sales equaling approximately 80% of total available units and a construction escrow reserve sized to cover remaining build out costs), short-term liquidity stress could arise when cash on hand is not sufficient to cover timely payment of interest on the notes. Although permitted by the transaction structure, the two most recent interest payments were partially covered with draws from the Debt-Service Reserve Account. To quantify the potential liquidity risks Newland could face throughout the construction phase of this development, Fitch has analyzed the expected cash inflows and outflows of the project for the next six to twelve months.
It is important to note that all cash expected to be needed to complete construction on the TOC is held in a trustee-controlled reserve account and subject to certain transactional covenants. This construction escrow account had $157.8 million in proceeds at Oct. 31, 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Panama condo sales down 80%

Wow! Right after the president brags about the economy in Forbes and local economists have stated that construction is the leader of Panama economic growth, this comes out.  Although this has barley gotten a nod in the local press, it is one of the most important stories of the year. Yes, those who read this blog knew it was going to happen almost two years ago, but what we didn't know is how severe the down turn would be and that the market has already has imploded. By early next year my guess is that most projects that are not fully sold and funded will not get completed.

From La Estralla

Investments in the construction sector were down by 35 percent in September and 78 percent in October compared to last year

The global financial crisis has started to put a premature end to the construction industry boom in Panama, and in 2009 the fall of this important industry is expected to be more pronounced. The local market has reached saturation point, and demand for new projects is falling.

As proof, in the month of September, investments in construction projects were down by 35 percent, compared to September 2007. The sale of projects in the month of October fell 78 percent compared to statistics for October 2007.

A study by the economist Osvaldo Lao for the Panamanian Association of Real Estate Agents and Promoters revealed that housing sales reached 1,766 in October 2007, while the number fell to just 438 this past October, the lowest monthly figure in the last two years. In housing complexes that cost less than $80,000 the fall was 75 percent.

For units costing more than $80,000 the fall in sales was 80 percent.

The housing sector of less than $80,000 proves to be the most marketable, with a turnover rate of less than 10 months.

Meanwhile, the turnover rate of housing valued at more than $150,000 can be as high as 26 months.

A total of 435 active projects with 14,342 available housing units existed in Panama during October 2008, an increase of 3 percent over September.

The report also revealed that the average cost of the housing units in the capital city last October dropped to $257,286, from $260,500 in September.

Tocumen and Arraijan are currently the most active zones. Beach and mountain projects are the hardest to sell.

Lao’s study suggests the need to clean up the market, as the presale percentage is too high, which could lead to the suspension of some projects.

The economist Juan Jovane believes that the main problem is that in 2009 “there will be no buyers, because the local market is saturated” and international buyers will stop coming.

Added to the fall in demand, Star sources say that banks have become stricter with their mortgages, offering them for only $1,200 a square meter and requesting buyers to pay the difference up front, a scenario that certainly does not help the real estate sector.

PRICES BY THE SQUARE METER

in 2008, average prices for construction square meters in the country increased by 11 percent. As investment in construction decreased for the past two months, prices for housing remained high. According to a study by the economist Osvaldo Lao, in the Balboa Ave sector the square meter of construction reaches $2,932 (compared to $2,612 in Oct 2007), while Punta Pacifica is quoted at $2,524.
Boquete is the only sector with a decreasing value, decreasing 3 percent to $1,390 a square meter. According to the study, Chorrera, 24 de Diciembre and Las Cumbres are among the most economic zones, in the mid-$500s a square meter. The value of Tocumen, Pacora, the mountain areas and Arraijan have rose the most, with 56, 53, 52, and 41 percent increases between October of last year and October 2008.

 

Should Panama be liable for Red Frog fiasco?

Less than two months ago I posted that the Red Frog Beach project had resolved the labor issues that had put a stop to the project and was back on track. I eluded in that post that  environmentalists would not be happy about this news, but that disappointment was short lived. Now a more significant hurdle has been put in place that has halted Red Frogs efforts to restart the project. The Panamanian Supreme Court has ruled against Red Frog for environmental reasons and is requiring the developers to resubmit another environmental impact study.

The wording of the judgment makes it clear that the justices take issue with the environmental agency's original approval of the project. This brings to question just how secure any project is in Panama that receives approval from ANAM or any other government agency for that matter. Developers can only go by the regulations and regulators who either approve or reject their plans. If the state agency approves the project and later the Supreme Court rejects that approval, who is responsible to make up the financial losses of the developer and the customers who have bought property in the project?  Who is responsible for the environmental damage that has supposedly taken place. In my opinion the state is liable and a financial remuneration to those who have experienced a loss would make the agencies more responsible in the future to see that they are in compliance with the laws governing developments of this type. As a developer or home buyer looking to invest in Panama, this latest decision would give me great pause. Panama needs to reassure foreign investors and home buyers hat they are safe investing in the country.

Here is the press release from Red Frog in Spanish and English.
Download Environmental Press Release

La Prensa
Supreme Court annuls Red Frog Beach’s EIA
 
The Third Chamber of the Supreme Court declared illegal the resolution adopted by the EIA study of the proposed residential and tourist Red Frog Beach, located on the Isla Bastimentos National Marine Park.
 
A decision by the Third Chamber of the Supreme Court has conservationists celebrating.  On November 27, the judges of the Third Division declared illegal Resolution 1A-218-2007 of the National Environmental Authority (ANAM), which had approved the Environmental Impact Study (EIA) of the second phase of Red Frog Beach project.  The project will be developed within the buffer zone of Isla Bastimentos National Marine Park in the province of Bocas del Toro, involved the construction of residences, a hotel, villas and a marina.

The ruling, the first against such type of resolution, now prohibits the construction works, for the moment.  Environmentalists, scientists and the communities surrounding the project rejected the same because of the environment impact that this will cause to the Park, considered one of the most important of the Atlantic in Mesoamerica, which also is part of the biosphere reserve of La Amistad.
The decision of the Third Division, under the presentation of Judge Winston Spadafora, emerges to settle a lawsuit for annulment submitted by the Center for Environmental Impact (CIAM) against the resolution.

The project is one that threatens the marine coastal resources, according to CIAM. The organization hopes the verdict will become a precedent for other projects that are against the environment.
The director of Legal Services of Anam, Harley Mitchell, said the ruling is "important" for environmental management of the entity. He said that the company should conduct another EIA for evaluation, if they want to continue with the project.

.
ENVIRONMENTALISTS WINS POINTS WITH RED FROG BEACH
 
Anam ignored collective interest
 
The National Environmental Authority (ANAM) approved the Environmental Impact Study (EIA) proposed by Red Frog Beach "ignoring" not only the interests of the community, but also aspects "momentous" of ecological impacts in the short, medium and long term that the residential and tourism works would cause.
This is part of the arguments that the three judges of the Third Division of the Supreme Court of Justice, Winston Spadafora, Adam Arnulfo Arjona and Victor Benavides, submitted to outlaw Anam’s resolution 1A-218-2007, which approved the EIA for the project's second phase Red Frog Beach Island Bastimentos, province of Bocas del Toro.
The decision of judges is due to an application for annulment submitted by the Center for Environmental Impact (CIAM) in November 2007, in the name of Milton Rutile and Delfino Hooker, neighbors of the park against the resolution.
The demand is based and declares that the Government, through Anam, violated national and international legislation on environmental protection.
Among local rules that were violated mentioned Act. 41, 1998, better known as the General Law on Environment and Law. 24, 1995 Wildlife in the country.
With regard to international standards, CIAM felt that Anam’s  decision violated four conventions ratified by Panama on the protection of marine ecosystems, biodiversity and climate change.
The project consisted in the construction of 700 houses, 7 condominium apartments, a 4-storey hotel of 100 rooms and 34 villas. Also includes a marina with a capacity for 250 boats, parking and a three floors activity center.
For Lina Vega, attorney for CIAM, there is no doubt that the project exceeded the carrying capacity of the Isla Bastimentos National Marine Park, established in 1988.
The demand was sustained also that Anam had already passed with 130 thousand dollars to the company Pillar Panama, which is developing the project, for breaches of environmental standards during construction of the first phase of the work.
Another aspect that CIAM questioned was the fact that Anam did not take into consideration the views of various groups on environmental damage that would produce the project at the time of approving the EIA, an aspect that the judges considered as part of Anam´s failure, environmental standards "for the benefit of particular interest and to the detriment of public interest."
"We are aware that progress involves development of tourism in a place it is ... for the benefit of the community and country. However, it has to consider always when approving an EIA, if the environmental impacts represent a threat to the conservation of an area ...", says the ruling.
Harley Mitchell, director of Legal Services of Anam, said the ruling is a tool that can be used by the institution to improve its environmental management.
According to Mitchell, during the current administration of the institution we have perfected many efforts related to environmental standards.
"We are analyzing the ruling and insurance will be useful for environmental assessments," the official said.

Trump Baja project in trouble

Well, more bad news associated with the famous Trump name. The Trump Baja project appears to be another victim of the ever growing credit crisis. Investors are justifiably irate when the project has barely broken ground when it was to be completed this spring.

 With developers unable to get financing for  projects sold using the Trump name it may do more than just tarnish his image. The developers say the 30% deposits collected have gone to land, working on the plans and starting the work and they don't have it to give back even though the buyers were told it was going into escrow. I hope the Donald got his money up front for his branding as the name is getting pretty badly trashed of late.

It is important to note that the Trump Ocean Club in Panama City is well underway, reports almost sold out and from all indications does not have a problem with financing. There are some similarities to these Latin projects in that Trump is lending his name and his children to help promote them. Lets just hope that this is where the similarities end and the Trump Ocean Club can help to bring back some much needed luster to the once vaulted Trump name.

Excerpts from Forbes: In October 2007 Trump was scoffing at the notion that the real estate slowdown could affect him. "Though it may be true that some of Baja's developments could see a slowdown, these market conditions simply do not apply to Trump Ocean Resort," daughter Ivanka Trump wrote in a newsletter sent to investors.

Trump has seen other early investors try to get out of their contracts as well, though it's hard to say if they are just running scared of the housing bust. In a suit in Miami, for example, 132 buyers want to cancel $146 million in contracts because they claim that a condo project, called the Trump Towers, was misrepresented as a Trump investment.

And from Sign on San Diego we get this: While the project bears mega-developer Donald Trump's name, the Trump Organization is merely a licensor, said Rhona Graff, Trump's assistant, and is not involved directly in developing the project.

But the Trump brand name was a selling point for many of those who invested in units, people who are becoming increasingly frustrated after having plunked 30 percent down on units that ranged in price from studios in the mid-$300,000s to $2.5 million for a penthouse.

“It kind of feels like we have been set up,” said Hamed Hoshyarsar, 30, an accountant from the Los Angeles area who raised $165,000 in cash with his brother and two friends as a down payment for a vacation unit to share.

“With a name like Trump, we figured it was good,” he said. “There were other developments that we could have paid a quarter of that for, but we figured with Trump, you can't go wrong.”

SuperClubs to open Panama property

SuperClubs will enter Panama for the first time next year with a Breezes resort near Playa Blanca.

The Jamaica-based all-inclusive operator is building a 300-room resort in Bijao on the southern Pacific coast.

It is due to open in the middle of 2009.

Executive chairman John Issa said: “As our first Central American resort this figures prominently in our expansion strategy in Latin America. Panama and Brazil are our top growth priorities.”

Breezes Busios resort in Rio de Janeiro is also due to open next year.

The property will feature a spa, roller-skating park and convention facilities. In addition to rooms and suites it will also house 110 villas.

This will be SuperClubs’ second property in Brazil after the Breezes Costa Do Sauipe in Bahia.

In total it operates 11 resorts in seven countries.